FinMin Seven report: “Energy prices are a concern but the economy is on solid foundations”

The Ministry of Finance said on Saturday that global energy prices and supplies remained sources of concern and that geopolitical disputes could escalate further, reigniting supply chain pressures that have recently eased.

“If so, inflation could still see a resurgence rather than a decline in 2023,” the economic affairs ministry said in its September report, while warning against premature celebrations. Retail price inflation in September hit a five-month high of 7.41%.

Nonetheless, he asserted that growth and stability concerns for India are lower than those of the world as a whole midway through FY23 and that the country’s medium-term growth rate is likely to be greater than 6%. According to the International Monetary Fund, India’s real growth could be 6.8% in FY23 and 6.1% in FY24, well above G-levels. 20.

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“Growth, stability concern less than the world as a whole”

The report says growth and stability concerns for India are lower than those of the world as a whole at the midpoint of FY23 and that the country’s medium-term growth rate is likely above 6%. According to the International Monetary Fund, India’s real growth could be 6.8% in FY23 and 6.1% in FY24.

“A long-awaited domestic investment cycle that had begun will gain momentum once the current external shocks – geopolitical strife and monetary tightening – fade. Corporate and bank balance sheets in India are ready for it,” said the ministry in the report, “Furthermore, recent developments elsewhere in the region further enhance India’s relative attractiveness as an investment destination.”

Economic activity, as measured by the composite PMI, was higher for India at 56.7 in the first half of this fiscal year, well above the global level of 51. Global inflation of 8% , represented by the median inflation of major economies, according to the report.

Similarly, the rupee weakened 5.4% against the greenback over the period, well below the 8.9% depreciation of the six major currencies in the dollar index.

The government’s push on business capital spending has remained unbroken this fiscal year, with investment spending through August 46.8% higher than a year earlier. The revenue-to-capital expenditure ratio, in fact, fell to 4.5 from 6.4 last year, reflecting an improvement in the quality of spending, according to the report.

Rising capital spending by the Center has also spurred capital formation in the private sector, reflected in the “robust performance” of the manufacturing industry over the past six months, the report added. Business sentiment also improved as input cost inflation fell to its lowest level in 23 months due to lower industrial metal prices, leading to higher profits for the private business sector, a- he declared.

However, the report flags upside risks to inflation, the path of which remains dependent on geopolitical factors. “Even though commodity prices have weakened as recession risks continue to rise in advanced economies, elevated imported inflation should pose an upside risk as the outlook for crude oil remains uncertain and strongly linked to geopolitical conditions,” he said.

The risk is further amplified by an appreciating dollar. In addition, unfavorable weather conditions threaten the outlook for food inflation. Core inflation remains stable at 6% in September and its trajectory will depend on the extent of the impending pass-through of higher input costs to the end consumer, according to the report.

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